Gold Juniors Reaching Milestones

Gold down on taper fears, even after early week gains

The gold price dipped -0.6% this week to US$1,744/oz as the Fed suggested that a taper could begin as soon as this November, even after gains early in the week as global markets were rattled by fears of contagion from the China real estate sector.

Artemis, Rupert and Probe all reach recent milestones

This week we review the milestones recently reached by three juniors, with Artemis releasing an FS for Blackwater, Rupert issuing its initial resource estimate and Probe releasing its PEA for the Val-D'Or East project after several years of drilling.

Producers and juniors down on decline in gold

The producers and juniors declined, with the GDX down -3.3%, GDXJ down -4.1% and the Canadian juniors mainly declining, as the gold price gave up its gains earlier in the week as the Fed suggested that a taper could begin before end-year.

Gold juniors reaching milestones

Gold fell -0.6% this week to US$1,744/oz, as the Fed suggesting that a taper to its stimulus could be coming as early as November this year offset a jump earlier in the week on concerns about liquidity issues at one of the biggest real estate companies in China, Evergrande, had global reverberations, sending equity markets tumbling on September 20, 2021. We view this as a good test of gold and gold stocks' resilience in the face of a reasonably strong downturn in equity markets, of which there have only been few since the early stages of the global health crisis.

Certainly gold proved an excellent hedge against the downturn on the day, seeing substantial gains, up 0.7%, with a flat performance from the another safe-haven, the US dollar (Figure 4). The producing miners, using the GDX ETF as the proxy, edged down -0.4%, strongly outperforming the S&P 500 Index and the MSCI World Index, both down -1.5%. Even the riskier junior gold miners, using the GDXJ ETF as a proxy, declined just -1.4%, outperforming the major equity indices, and substantially beating the US small cap index, down -2.4%.

Silver also held up reasonably well, declining just -0.6%, with producing silver miners, using the SIL ETF as a proxy, down -1.4%, exactly inline with the junior gold miners, and the junior silver companies, using SILJ as a proxy, down -2.0%. The base metals took a considerable hit, indicating this segment's vulnerability to concerns of a broader economic slowdown, with copper declining -3.0%, the ishares Global Metals & Mining Producers ETF down -4.3%, and copper miners, using the Global X Copper ETF as a proxy, dropping -4.8%. For more detail on how gold and gold stocks have performed in downturns over the past twenty years, and potential ways to hedge, or profit, during these situations, see our previous weekly.

Artemis, Rupert and Probe all reach significant milestones

This week we look at three TSXV-listed junior gold miners that have recently reached significant milestones. Artemis Gold is the most advanced, releasing a Feasibility Study on September 13, 2021, with relatively limited changes from its Pre-Feasibility Study reported in August 2020. Rupert Resources, one of the strongest performing junior gold mining stocks on the TSXV over H2/20 on a series of strong drill results from the Ikkari zone of its Pahtavaara project, released its initial mineral resource, also on September 13, 2021. Probe Metals, which has been drilling at its Val-D'Or East project in Quebec since 2016, released a PEA for the project on September 7, 2021, with a large NPV compared to many of its TSXV-listed gold junior peers.

There were no major share prices moves for Artemis or Probe on these announcements, suggesting that both the respective FS and PEA were broadly inline with market expectations (Figure 5). However, since the resource estimate release, Rupert's share price dropped -19.3%. This may partly be because Rupert's eightfold over H2/20 had likely attracted a large of amount of shorter-term speculative holders, who have exited on the initial resource news, after seeing the share price stagnate in 2021. This is common with juniors as the story shifts from a 'sky is the limit' one of drilling results perpetually surprising to the upside, to a more 'down to earth' one, where the limits to the resource are starting to be defined more clearly.

Limited changed in Artemis's Feasibility Study for Blackwater versus PFS

There were relatively minor changes in Artemis's Feasibility Study released on compared to its August 2020 Pre-Feasibility Study, which lead to the muted reaction from the market on the news. The estimate for gold recovered increased by just 3k oz to 7,453k oz and for silver by 24k oz to 40,398k oz, and the throughput increased by 1.8 Mtpa to 19.7 Mtpa, driving an increase in annual average production by only 15k oz Au to 339k oz (Figure 6)

While this increase in production and an increase in the assumed gold price to US$1,600/oz from US$1,541/oz in the PFS did boost revenue, this was offset by an increase in costs. The major increase in costs were a rise in the initial capital cost by 9.0% to $645mn, $52mn in deferred capital costs compared to zero previously, and a 30.4% rise in the sustaining capital cost to $831mn. Although the Phase 2 and Phase 3 expansion capital cost declined by -18.5% and -6.0%, respectively, total costs rose 9.5%. Overall this lead to a marginal -2.9% decline in estimated project value in FS versus the August 2020 PFS to an after-tax NPV of $2,151mn, for an aftertax IRR of 32.1%, compared to 35.0% for the PFS.

Artemis's project is the second largest of the major TSXV-listed gold developers, surpassed only by Chesapeake Gold's Metates project with an after-tax NPV from its PEA of $2,400mn, with the third largest Lumina's Cangrejos project with a value of $1,600mn (Figure 7). The market is currently attributing considerably more value to Artemis's Blackwater, with a market cap/project NPV of 39%, compared to a market cap/project NPV of just 10% for Metates and 11% for Cangrejos.

This is because Artemis is at a far more advanced stage of de-risking the project. So far this year the company has secured $360mn in debt financing for Blackwater, closed a $171mn equity financing, signed an Impact Benefits Agreement with the local community, received an Early Works permit from the British Columbia government and been awarded a guaranteed price on an electricity transmission line. While there are still risks given the 22 year mine life and ongoing high capex costs, the market seems to be pricing in profitability at least for the early years of project.

While a potentially huge project, Metates' valuation has been held down by high expected costs, and while Chesapeake Gold has been investigating new methods to develop the project that would lower costs substantially, the market is still not pricing in a major probability of its successful implementation. For Cangrejos, there has been limited news flow over 2021, with only two press releases, an EIS approval in February 2021 and a C$26mn private placement in September 2021, and the last major lift to the share price occurred after the release of the PEA in June 2020. The earlier stage of Cangrejos versus Blackwater and the lack of clear drivers over the past year likely largely explains the project's major discount to the NPV.

Rupert Resource declines following initial resource estimate

Rupert Resources released its initial resource estimate for its Ikkari project on September 13, 2021, with a total 3.95 mn in Inferred Resources (Figure 8). The size of the resource is reasonably large compared to the other major TSXV-listed developers and explorers, between Orezone's Tuvatu, with 6.16 mn oz Au and Bluestone's Cerro Blanco, with 3.02 mn oz Au (Figure 9).

Rupert's share price had been one of the best performers of the TSXV gold explorers in H2/20, rising eight-fold from April 2020 to November 2020. However, it has declined -25.2% in 2021 as the gold price has range traded this year, and drilling results, while still strong, seem to have been largely priced in by the market, and the resource estimate has likely driven some speculators out of the stock.

The company is now shifting from a more exciting phase of early strong drill results into the more mundane process of filling out the resource and then grinding through the permitting phase, which can take years. We could therefore expect a period of less impressive moves for the share price especially compared to the huge gains in H2/20, barring the discovery of another zone similarly outstanding as Ikkari.

Probe Metals issues PEA after several years of drilling

Probe Metals released a PEA for its Val-D’Or East project, with press releases on drilling at the project by the company dating back to 2016. The PEA estimates 2.584mn oz Au recovered, with a 12-year LoM with 207k oz Au average annual production. On the cost side, initial capex is targeted at $353mn and sustaining capex at $602mn, with cash costs of US$786/oz and AISC of US$965/oz. The total aftertax NPV of the project is estimated at $598mn, for an IRR of 32.8%.

The market cap/NPV for Probe, at 45%, is similar to Artemis, at 39%, and Integra, at 42%. If we view the market cap/project NPV as a gauge of the market's expectation that a project's full value with be realized over time, this suggests that these three projects are viewed by the market as having similar levels of risk. The large size and life of these projects implies high risks to raising capital and the potential for a downturn in the gold price, which appear to be particularly heavily discounted in the market value of Chesapeake's Metates and Lumina's Cangrejos, as discussed above.

These two risks can be lower for small projects, with their lower capital requirements and shorter mine lives, and there appears to be higher market confidence in smaller operators Orezone, with its Bombore project, Mako, with San Albino, and Lion One with Tuvatu, which all have market caps above their projects' NPV. This implies the market expects the companies to not only realize the NPV of their projects, but either expand these projects further, or add additional value from other projects.

Producers nearly all down as gold edges down

The producing gold miners nearly all declined as gold edged down (Figure 12). Kirkland Lake reported a Q3/21 dividend of US$0.1875/share, Equinox reported a PFS for the Aurizona Expansion, with a 1.5mn oz LoM production and an after-tax NPV of $314mn, and a 73% rise in P&P Reserves to 1.7mn oz, and 0.86mn M&I and 0.89mn Inferred Resources, and Iamgold reported drill results from the 2021 resource delineation drilling on the Gosselin Zone at the Cote Gold project (Figure 14).

Canadian juniors mainly down on dip in gold

The Canadian juniors were mostly down, on very limited news flow (Figure 13). For the Canadian juniors operating mainly domestically, Amex reported results from the QF Zone along the past-producing Normetal Mine Horizon at Perron (Figure 15). For the Canadian juniors operating mainly internationally, Integra closed its bought deal financing with 6.785mn shares issued at US$2.55/share for proceeds of US$17.3mn (Figure 16